China’s factory slump worsens as fears of a recovery mount

(Bloomberg) – China's economic recovery weakened in May as manufacturing activity continued to fall, prompting investors to sell off equities and call for more stimulus measures to boost growth.

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The official manufacturing PMI fell to 48.8, the National Bureau of Statistics said on Wednesday, the lowest reading since December 2022 and weaker than the median estimate of 49.5 in a Bloomberg poll of economists. A reading below 50 signals a month-on-month decline.

A non-manufacturing measure of activity in services and construction fell to 54.5 from 56.4 in the previous month, also below expectations.

The data confirms that the economy's recovery slowed in the second quarter after a surge in consumer activity earlier in the year. Calls for more stimulus measures, such as rate cuts, are growing louder as investors become more pessimistic about growth prospects. Exports remain weak, the housing market recovery has faded and companies are suffering from falling profits.

“This adds to indicators since April suggesting economic recovery momentum has continued to slow,” said Ho Woei Chen, economist at United Overseas Bank Ltd. in Singapore. “Given weak domestic inflation, there will be pressure to increase monetary policy support.”

Financial markets were rocked by China's faltering recovery. An indicator for the country's Hong Kong-listed shares fell as much as 2% on Wednesday, making it the region's worst performer. The offshore yuan weakened 0.38% to 7.1182 as of 10:10 am local time against the dollar, extending its loss to 2.7% in May, the highest in three months.

Copper futures in London fell, leaving the metal facing its worst monthly loss in almost a year. The sharp fall in China's steel PMI, which recorded a reading of just 35.2 – its lowest level since July 2022 – caused Singapore's iron ore to fall by as much as 3.3%, pushing the steel industry staple further below 100 US dollar per ton fell.

Slower growth in the service sector – the index fell to 53.8 this month from 55.1 in April – is another worrying sign, as it has been the main driver of the economic recovery this year and a major source of jobs, particularly for young people.

The services new orders sub-index was below 50, “pointing to a gap on the demand side,” said Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group Ltd. Slower growth would put pressure on youth unemployment, which is already at record levels, he said.

What Bloomberg Economics Says…

The weak data underscores the lack of confidence in the private sector and reinforces the case for further policy easing, particularly on the monetary side.

– Chang Shu, chief economist for Asia

Read the full report here.

Economists have lowered their growth forecasts for the year to 5.5%, which is above the government's fairly conservative target of around 5%. While many expect the central bank could still ease policy this year — including cutting bank reserve ratios or cutting interest rates — officials are reluctant to take aggressive action.

“There were many pledges to support the economy earlier in the year, but none of them are being implemented, which frustrates me the most,” said Yang Zhiyong, general manager of Beijing Gemchart Asset Management Co.

Chinese state media quoted analysts on Wednesday as saying more pro-growth policies, including interest rate cuts and more bond sales, may be on the cards.

Beijing is likely to take targeted steps to stimulate the economy. According to a person familiar with the discussions, officials are considering new tax incentives worth hundreds of billions of yuan for high-end manufacturing companies.

“It's not clear how the government is interpreting the current economic situation,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management. “There is no sign of an imminent political response. The government could continue to adopt a wait-and-see attitude for the time being.”

– With support from Chester Yung, Shikhar Balwani, April Ma and Jason Rogers.

(Updates with more comments from economists and an investor.)

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